Whole Foods Market, Inc. – SWOT Analysis

Whole Foods is one of the world’s largest retailer of natural and organic food products.Whole Foods recoded strong financial performance in the recent years. In 2007, the company’s revenues grew by 17.6% over 2006, to reach $6,591.8 million, in 2007. The Strong revenue growth has helped the company to pursue its expansion plans and improve its bargaining power in the market. However, a slowdown in the US economy could adversely affect the sales of the company in the long run.

Increasing competition Labeling and other regulations Slowdown in the US economy

Strengths

Strong revenue growth
Whole Foods recoded strong financial performance in the recent years. In 2007, the company’s revenues grew by 17.6% over 2006, to reach $6,591.8 million, in 2007. The company’s revenues grew at a compounded annual growth rate CAGR (2005-2007) of 18%. The increase in revenue was driven by 14% square footage growth, excluding acquired Wild Oats locations, and comparable store sales growth of 7.1%. Whole Foods recorded sales per gross square foot of $923 in 2007, an increase of approximately 7% over 2006. The Strong revenue growth has helped the company to pursue its expansion plans and improve its bargaining power in the market.

Focused growth strategy

Whole Food’s focuses on expansion, primarily through new store openings. During 2007, the company opened 21 new stores across the US and Canada. For instance the company opened its first store in Maine, the US, in February 2007. The store has a retail space of 48,000 square feet which offers many unique features not found at an average supermarket, including a coffee bar, an all-natural taffy-pulling machine, a sit-down sushi bar, and a trattoria with an oven featuring hot Italian entrees and a variety of items grilled to order.The company continued its growth strategy in 2008, by opening its new store in Napa, California, in January 2008. The new store also includes a wine bar. Further, the company has signed leases for 87 stores scheduled to open through fiscal year 2010 totaling approximately 4.5 million square feet, or approximately 48% over the existing selling space.
The company has also grown through mergers and acquisitions, with approximately 32% of its existing square footage coming from take-over’s. In August 2007, the company merged with Wild Oats markets based in Boulder, Colorado Since, the natural foods retailing industry is highly fragmented and comprised of many small local and regional chains, mergers and acquisitions have provided the company access to desirable markets, locations and experienced team members.
A focused growth strategy has helped the company to reach a wide customer-base and diversify its revenue streams. Wide product portfolio
The company offers a broad product selection in all its stores, including seafood, grocery, meat and poultry, bakery, prepared foods, specialty (beer, wine and cheese), whole Body (nutritional supplements, vitamins, body care and educational products such as books), floral, pet products and household products.

In its larger stores (between 60,000 to 80,000 square feet), it stocks an even larger selection of organic food and non-food products. These stores also have catering services where customers can purchase made-to-order foods. Moreover, the company’s emphasis on fresh food gives the company an edge over its competitors who usually just offer packaged foods. Wide product portfolio allows the company to address multiple customer segments, apart from insulating it from any significant fall in demand for any specific product or segment.Weaknesses

Weak international operations

The company has weak international operation with just three stores in Canada, and six in the UK. The company’s operations in the UK and Canada are not yet large enough to derive economies of scale in purchasing and distribution, resulting in relatively high product prices. These higher prices erode the competitiveness of the company relative to its established international rivals, who have larger scale operations and, therefore, leaner economics.Whole Foods’ weak international operations are likely to prove a drain on the resources of the company.

Conservative advertising policy

Whole Foods relies heavily on word-of-mouth publicity, a disadvantage in comparison to its competitors who aggressively use print, television and online media. The company spends meager amounts on advertising and marketing relative to its competitors. In 2007, the company spent 0.5% of its total revenues on advertising. Since, demand for organic foods is increasing; there is scope to further step up the growth rate through aggressive advertising assuming that consumer awareness of organic products is still relatively low. Competition in the organic product segment is also increasing as more retailers begin to offer organic products. With Whole Foods still relying heavily on word-of-mouth publicity, its new stores may take longer than usual to break even.

Increasing rental expenses
Whole Foods is committed under certain capital leases for rental of equipment and certain operating leases for rental of facilities and equipment. In the recent years company’s rental expenses has increased significantly. During 2007, the company’s rental expense was approximately $201 million as compared with that of $99.9 million in 2004. Moreover the company also paid contingent rental of approximately $9.9 million in 2007 as compared with that of $4.8 million in 2004. Increasing rental expenses have a negative impact on the margins of the company.

Opportunities

Higher demand for organic products
Natural and organic food products segment is one of the fastest growing categories in food retailing. There is an explosive growth in the demand for organic foods because of the increasing preferences among consumers for healthy food. The US, Germany, and the UK would be the key geographical areas of growth for the organic food market.The US organic food market grew by 12.3% in 2006 to reach a value of $15.9 billion.

The US organic food sales are expected to reach almost $24 billion in 2010.The organic food market in Germany is anticipated to grow at a CAGR (2007–2011) of 12%. Japan will be the leading Asia in terms of organic food market revenue and its market is anticipated to grow at a CAGR (2007–2011) of 29.8%.

Although organics represent just about 2% of the total food and beverage sales in the US, the market is growing 20% annually. More and more consumers across the US prefer natural, fat-free and healthy food products. Food items containing trans-fat are losing market share to low calorie, low fat, natural and organic products. Increasing customer preference for organic foods is likely to favorably impact the company’s sales, given its leading market position in the segment.

Expansion in the UK
Whole Foods entered the UK with the acquisition of Fresh & Wild in 2004. Further, in June 2007 the company opened its first flagship store in London. The 80, 000 sq ft store, could be a major step in company’s expansion initiatives outside US. The company currently operates six stores in the UK including new store and the stores acquired from Fresh & Wild.The sales of organic food and drinks in the UK have doubled in recent years and approximately two thirds of British adults consume organic food and drinks.The UK market for organic food and drinks is expected to increase by 72% to reach a value of £2 billion by 2010. The strong growth in the UK organic food and drinks market would eventually translate into higher demand for the company’s products.
Growth of the UK organic food and drinks market provides an opportunity for Whole Foods to expand its existing operations, resulting in economies of scale in supply chain.

Growth in private label products
Private label products in the US are witnessing a strong growth in sales. Consumer spending on private label food, drinks and personal care in the US is expected to rise from $108 billion in 2005 to $137 billion by the end of 2011. Private brands now account for one of every five items sold in US retail stores, drug chains and mass merchandisers. Approximately 41% of the US shoppers currently buy private labels as compared to 36% five years ago. Private labels account for 20% of the items sold in US supermarkets, drug chains, and mass merchandisers. They account for more than $50 billion of current business at retail. It is estimated that US groceries shoppers derive approximately $15.8 billion in annual savings by purchasing private label products.
Whole Foods’ private label offerings feature over 2,000 stock keeping units (SKUs). The company markets its private label products under the following corporate brands: 365 Everyday Value, 365 Organic and the Whole Brands family. Additionally, the company has number of store-made and regionally-made fresh items sold under the Whole Foods Market label. It also offers specialty and organic coffees and teas through its Allegro Coffee Company subsidiary.

The 365 Organic Everyday Value brand provides the benefits of organic food at lower prices. The company has expanded this program to non-grocery departments, including a line of organic fresh vegetables.Whole Kids Organic is an organic food product line developed for children under the Whole Kids label. Whole brands include Whole Kitchen (frozen grocery), Whole Treat (frozen desserts and candies), Whole Catch (frozen seafood items), Whole Fields (produce and produce support items), Whole Pantry (pantry items such as flavored olive oils and vinegars), Whole Creamery (cheeses), Whole Dairy (eggs) and Whole Ranch (frozen burgers and franks).
Private label brands provide higher margins than branded products for the retailer and Whole Foods Market already has an established portfolio of strong private label brands.This increased acceptance of the private label products will have a favorable impact on the company’s margins.

Threats

Increasing competition
Whole Foods’ competitors include natural foods supermarkets, conventional and specialty supermarkets, other natural foods stores, warehouse membership stores, small specialty stores and restaurants. These businesses compete with it in one or more product categories. In addition, some traditional and specialty supermarkets are also expanding more aggressively in marketing a range of natural foods, thereby competing directly with the company for products, customers and locations. For example during 2006, Wal-Mart announced that it will focus on the organic segment. The retail giant aims to become the low-price leader in organics, not just in food but clothing, electronics and other household products. Wal-Mart has already doubled its organic range in fresh produce, dairy and dry food items during 2006.
Some of these existing and potential competitors have greater financial or marketing resources than Whole Foods, and may be able to devote greater resources to sourcing, promoting and selling their products. Increased competition may have an adverse effect on profitability as the result of lower sales, lower gross profits and/or greater operating costs such as marketing.

Labeling and other regulations
As the company operates in the natural and organic foods market, its stores and products are subject to several laws and regulations relating to health, sanitation and food labeling. Several federal agencies and departments including the Food and Drug Administration (FDA), the Federal Trade Commission (FTC), the Consumer Product Safety Commission (CPSC), the United States Department of Agriculture (USDA) and the Environmental Protection Agency (EPA) set critical standards for the manufacture, processing, formulation, packaging, labeling and advertising of products.
Failure to comply with these standards could result in penalties and seizure of marketing and sales licenses.These regulations also result in additional compliance costs, which could reflect in reduced margins.

Slowdown in the US economy
The US is the key market for Whole Foods. According to the Organization for Economic Cooperation and Development (OECD), GDP growth in the US is expected to slowdown in 2008.The GDP growth of the US economy is forecast to slow down from an estimated 3.3% in 2006 to 1.9% in 2008. A slowdown in the US economy would depress the purchasing power of the retail customers, which in turn will depress revenue growth and reduce margins of Whole Foods. Slowdown in the US, the key market for Specialty retail chains such as Whole Foods Market, will put pressure on the revenues of the company.